Store cards carry risks

NEW YORK | The offer could tempt anyone buying holiday gifts: Open a store credit card and save 20 percent on your purchase.

The smiling sales clerk makes it sound like a no-brainer and explains there are absolutely no fees. You’ll even get alerts about special sales and promotions.

What won’t be so eagerly volunteered is the high interest rate or the impact applying can have on your credit score. Store cards are also limited and shouldn’t be confused with co-branded cards. The latter carry Discover, MasterCard or Visa logos and can be used wherever those cards are accepted.

There are times when it makes sense to open a store card. Just be sure you know the pitfalls.

The risks

The first sign you should say no thanks? You’re weighing the decision at the counter or after stumbling across an online offer to “Apply Now!”

Opening any line of credit comes with repercussions, and it’s not a decision you should make on a whim.

Of course, the one-time discount for applying is usually offered at checkout. But is $20, or even $50 or $100, worth putting your finances on the line? Ideally, you’ll decide whether you want a store card before you start shopping.

One factor to take into account is whether you’re prone to carrying a balance. Store credit cards often come with high interest rates, so any discount you get upfront could quickly be erased.

Consider the JCPenney card, which has an interest rate of 23.99 percent. The high rate is typical of store cards and is the reason people end up forking over so much money in finance charges, said Greg McBride, an analyst with BankRate.com.

There’s another risk if you don’t shop at the store often. It may sound overly cautious, but it could mean you’ll be slower to detect identity theft. Even if you’re not held accountable for any fraudulent charges, getting the mess sorted out will be a headache.

Credit-score impact

Applications for new credit, whether it’s a store or bank card, can lower your score. This is especially true if you open several cards in the span of a few months. So you’re not beating the system if you open an account just to get the discount, then cancel it soon after.

Given this tight credit environment, you might also be tempted to open a store card as a way to boost your credit line (which is another factor in your score). However, store cards typically come with lower credit lines than bank cards, although the exact amount will vary depending on your risk level.

The dip your score initially takes will likely outweigh any positive impact, too. It’s only over time that your score will reap the benefits of the higher credit line, said Craig Watts, a spokesman for FICO, the company that produces the most widely known credit scores. And that’s assuming you make payments on time.

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